Grocery E-tailing Start-ups A Dime A Dozen, But Investors Wary; Would You Buy Veggies Online?

Grocery E-tailing Start-ups A Dime A Dozen, But Investors Wary; Would You Buy Veggies Online?

Grocery e-tailing seems to have caught on as one of the new verticals in Indian e-commerce space and spawned a bunch of start-ups. Most of these are self-funded by the entrepreneurs who are operating in various metros and initially trying to gain traction in the regional market before going national or expanding to multiple cities. Some of them have also introduced a hybrid business model, running a few physical stores, as well as portals.

Some of the key players in this business include MyGrahak.com (operated as a separate business by the offline retail chain firm REI Six Ten Retail Ltd), Aaramshop.com, Zopnow.com, Farm2kitchen.com, Freshndaily.com and Veggiebazaar.com.

As global giants have already experienced, grocery e-tailing is one of the trickier part of online retailing. The business faces quite a few issues, such as delivery in densely populated cities where it flourishes, as against the spread out cities in the USA where consumers prefer lugging around a month's or a fortnight's supplies from a hypermarket. This is precisely why Amazon is not a very big name in grocery e-tailing although it has a bunch of sites including Amazon Fresh, Soap.com and Webvan.com (it went bankrupt in 2001). E-grocery also faces challenges in terms of logistics and inventory management when it comes to handling perishable products at the backend.

Not surprisingly, therefore, most online grocers have struggled to make the business profitable. Ocado of UK, one of the biggest pure grocery retailers (as against the Amazons and the Tescos of the world) is struggling to pump out profits even after 10 years in the business and around $1 billion in annual revenues.

So where does that leave the fledgling grocery e-tailers in India? Techcircle.in brings you a status check on the industry, as well as the pain points and the challenges, besides investors' viewpoints regarding its viability.

E-grocery: A Good Concept With Little Potential?

Six-month-old Shopveg.in is one of those many e-tailers which have cropped up in the past one year. The site supplies fruits and vegetables to selected areas in Mumbai. The founders are 2009 IIT graduates Saurabh Dhapodkar and Koushik Mandal, and the operations started in August 2011.

Shopveg.in claims that customers come back to the site every week for online shopping while the average order size is about Rs 750. "We are making good progress and are in talks with a lot of angel investors for initial funding. This segment is now gaining a lot of traction with many players coming in," says Dhapodkar.

But the question is: Will investors take the leap of faith?

"These businesses are difficult to turn into profitable ventures due to the low margins and the logistics costs involved. In addition, fresh fruits and vegetables have short shelf life, which causes wastage and adds to the cost burden. In all likelihood, these will be businesses with razor-thin margins," comments Gaurav Saraf, director of Epiphany Ventures.

This is true to some extent as selling products is one thing, but making money out of it is quite different.

Mukul Singhal, vice-president of SAIF Partners, notes, "E-commerce in India has been evolving from Day I. Initially, we were purchasing books, then apparel, accessories and electronics. Now, these online grocery shops are coming up. The idea may have the potential but then, it has a lot of logistics issues. There has to be proper supply chain management, delivery mechanisms and then there is the fact that most of these goods are easily perishable."

However, the addressable market in this space is certainly huge. People have to buy groceries â€“ be it boom or slump. Currently, the bulk of the purchase comes from the neighbourhood stores or vendors selling vegetables and fruits. But gradually, the organised sector supermarkets are making foray and online grocers have much ground to catch up.

Also, innovations seem to abound as a bunch of new-generation players enter the market.

For instance, there is Farm2kitchen.com, which deals only in organic groceries and textiles, and caters to Gurgaon and surrounding areas. Founder Seema Dholi, who hails from Pearl Academy of Fashion and has several other ventures in her basket, such as Divavee and Fashion Per Inch India, wants to educate local consumers about the benefits of organic groceries and then spread the message to the rest of the country. Set up in 2011, Farm2kitchen is now looking for funds but even before that, Seema wants to expand operations and go pan-India.

Another start-up which is generating interest is Aaramshop.com. It runs on the concept of connecting the local kirana stores with the buyers while storing inventories on the Cloud. The site accepts online orders and allows the customer to select the local store of his/her choice. The order is then forwarded to the shop and goods are also delivered by that local store.

"Online shopping for daily essentials is a trend that will take some time to flourish as it is linked to a larger behavioural change. However, as more and more urban couples try and create a work-life balance, they will value the ease and convenience of online grocery shopping," says Vijay Singh, CEO & MD of Aaramshop.com. Singh has started the company in April 2011 and claims to have around 24,000 registered users who buy from 1340 retailers registered with Aaramshop.

ZopNow is another interesting start-up, which currently operates in Bangalore. "Initially, we interviewed a lot of consumers and figured out that people in Tier I cities would prefer an online daily needs service, primarily for the convenience. So we are currently focusing on Tier I cities. We do believe that this trend is here to stay, as life for majority of consumers will become busier and time will be at a premium," explains Mukesh Singh, co-founder of ZopNow.com, which is an online hypermarket selling almost all products available at a brick-and-mortar supermarket. Singh had worked with MakeMyTrip before starting his own venture with co-founder Bal Krishna Birla. According to him, the site enjoys repeat business from 75 per cent of its customers.

Interestingly, urban couples, low on time and high on stress, seem to be the customer description of almost all e-grocers.

Another distant cousin of ZopNow is Mygrahak.com, which is an online supermarket. Mygrahak is a Delhi-based online store offering products across a huge breadth of categories, similar to that of ZopNow. It claims to have an average order size of Rs 1,300 and plans to expand to top four metros by the year-end.

"We are looking to get some funding this year and will use it to expand to other metros. But for expansion, it's most important to have a proper supply chain mechanism in place and that will be our focus as well," details Ambuj Jhunjhunwala, founder & CEO of Mygrahak.com.

However, the competition is not limited to new-generation e-grocers alone. The good old kirana stores also give them a run for their money as people often buy groceries and other utility items from local shops while enjoying a personal rapport with the owners, built over a long period of time. Even large retailers trying to scale up their businesses find it difficult to outcompete the neighbourhood stores.

But online grocers say they are catering to a different audience altogether â€“ people who don't have the time (or the inclination) to go to the local kirana stores and buy supplies. So the online model is more convenient for that target audience.

What Can Spoil Their Goodies

The first challenge one faces is to manage the short shelf life of the inventory due to the perishable nature of vegetables and fruits. Moreover, such produce must be in good condition when delivered to customers. Therefore, supply chain and inventory management remains a huge challenge in this space.

"The grocery market in extremely fragmented India and selling groceries online is even tougher. It is a difficult venture and these challenges make investors more cautious while evaluating such initiatives," says Singhal of SAIF Partners when asked if he would invest in such a company.

"Such a venture can only survive on repeat purchases and that's what one needs to target. If a company knows what it needs to stock, how much it needs to stock and where it needs to deliver, the business will become simpler to manage and run. The firm needs to find a strong value proposition and target market to survive the cut-throat competition," says Saraf of Epiphany Ventures.

Taking Stock

The thumb rule of e-commerce and especially entrepreneurship is not to underestimate any start-up. As Mukul Singhal has also stated, "It is a difficult venture to start but then, nobody can tell the future. As an investor, I don't think I would totally write off any new concept. The market has its own set of challenges but those challenges will lead to new opportunities."

As most of these start-ups have started operations only during the last 10-12 months, it is still too early to evaluate the bigger scenario or predict the future course of this nascent segment. Investors may be wary of these ventures, but that makes it all the more tempting to prove the worth.